What is Inheritance Tax?

Inheritance Tax is tax paid on the value of property, land and money that belonged to someone who has died.

These assets are called their ‘estate’. Inheritance Tax is only payable on estates over a certain value.

In 2019-19, Inheritance Tax is payable on all estates valued at over £325,000. This threshold has been the same since 2011 and is not going to change next tax year. Any estate valued at less than £325,000 is said to be in the nil-rate band.

Any estate over £325,000 owes inheritance tax at a rate of 40%. But this only applies to the amount left after deducting the tax free £325,000.

Example:

Your estate is worth £550,000 and the tax free threshold is £325,000. 40% inheritance will be payable on £225,000. (£550,000 – £325,000) So, on a £550,000 estate, the inheritance tax bill is £90,000.

The estate also includes any gifts that the deceased has made during the last seven years of their life, with certain exceptions. These exceptions include direct bequests to a spouse or civil partner, and gifts made to certain charities or political parties. Gifts made within the seven years before death are subject to a sliding scale of inheritance tax.

Bequeathed property

The transferable allowance for property you are leaving to a family member is £125,000 in 2018-19 tax year. This goes up to £150,000 in 2019-20.

Married couples and civil partnerships

Married couples and those in civil partnerships can pass on their estates to each other without paying any inheritance tax.

If the person who has died is married, or has a registered civil partner, that spouse or partner can increase their own threshold for Inheritance Tax, depending on the amount of Inheritance Tax that was initially paid. In practice, this means that a couple’s threshold may be up to twice that of an individual.

Limiting the amount of inheritance tax

Many people wish to see as much of their estate passed on to their nominated parties as possible and seek to limit the amount of inheritance tax charged. The rules allow for this in certain circumstances. Gifting money and assets can avoid inheritance tax, as long as it is seven years before death. It is also possible to write a deed of variation into your will or put your life insurance policy under a trust.

Inheritance Tax is typically complex and seeking financial advice is recommended to ensure that you are being as tax efficient as possible.

Who has to pay the inheritance tax?

Usually, the inheritance tax bill money comes out of the total value of the estate in question. The executor of your will is responsible for administering the IHT and it must be paid within six months of the death. You need to factor in a three week waiting period to get your Inheritance tax reference number from HMRC before you can actually pay the bill. Any heirs are not usually left with IHT to pay on your estate. But, if they received gifts from you within the seven years before your death, they are liable for the tax on those items. The money they owe will be taken from your estate’s total, if they are not able to pay the IHT on your gifts.

It is possible to overpay inheritance tax, depending on movement in house prices. If you think this may be the case for you, it’s worth investigating if you are owed an inheritance tax rebate claim.

For further Tax information, please follow the links below: